Silicon Valley

Unpacking Pinterest’s $150M Series Whatever

Alex Wilhelm is the editor-in-chief of Crunchbase News and co-host of Equity, TechCrunch’s venture capital-focused podcast.

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In a slightly surprising move, Pinterest raised $150 million from private investors this week.

The round is notable for a few reasons:

The company is widely tipped to be heading for an early 2018 IPO.

It has rapidly expanding nine-figure revenues.

It has raised far more in its preceding capital tranche.

Why the firm may have wanted the cash isn’t too hard to understand. When the markets offer you lots of cash on good terms, you tend to say yes. But let’s explore the round for a minute so that when this particular decacorn does finally file, we’ll be on solid footing.

The round

Reports indicate that Pinterest’s $150 million was raised at its preceding per-share price. However, the company’s valuation rose more than you might expect. Pinterest had disbursed more equity during the intervening time, to quote Bloomberg:

The last fundraising round was in April 2015, valuing the business at about $11 billion. Because the number of shares in the company has grown over time, its new valuation is $12.3 billion, Pinterest said.

$150 million is a small portion of $12.3 billion. In fact, it’s just over 1.2 percent. Therefore, the amount of equity that Pinterest sold in its post-Series G round was incredibly modest.

The capital injection is also modest when compared to how much money the firm had raised previously. That sum, $1.32 billion or so, comes to $1.47 billion when you include the company’s newest round.

Further putting the $150 million in context, Pinterest’s last round was tectonic. As TechCrunch wrote at the time:

Pinterest confirmed that it has padded its Series G funding a bit and is carrying out a new secondary sale that will allow employees to cash in some of their shares.

As first reported by Re/code, the social sharing startup raised an additional $186 million in funding as part of its Series G round, bringing the total amount raised in that financing to $553 million.

In short: Pinterest’s most recent round is small compared to its valuation, total capital raised to date and its most recent round. But there is one other comparative stick.

Revenue

We were a bit quick to summarize a moment ago, as the new round is also small compared to Pinterest’s revenue. It’s a growing sum, which it likely needs to go public in order to provide liquidity to its backers.

There are a few numbers to digest. We’ll start with TechCrunch, which wrote the following in 2015 after the firm’s Series G:

TechCrunch has obtained documents that show Pinterest has been forecasting $169 million in revenue [in 2015] and $2.8 billion in annual revenue by 2018. Pinterest was also expecting to grow its monthly active users to 151 million by the end of 2015 and 329 million by 2018.

The same TechCrunch article notes that Pinterest was on a $90 million top line “run rate” in the fourth quarter of 2014, and its revenue was less than $25 million.

Moving on, it appears Recode has the most recent disbursements of private information. (Pinterest declined to comment on its revenue history. The firm reiterated to Crunchbase News that it has seen its per-search revenue double this year.) Here’s the publication in March of this year:

Pinterest […] is targeting more than $500 million in revenue in 2017, according to multiple sources familiar with the company’s plans. Some believe the company could generate as much as $600 million this year.

The Recode article goes on to state that the company brought in $100 million of revenue in 2015, and that the company trebled that result in 2016.

So the company moved from less than $25 million in 2014 to around $100 million in 2015. In 2016, it was in the ballpark of $300 million. Now, it’s expected to reach $500 to $600 million this year. (The $100 million 2015 result is far less than the prior $169 million forecast that TechCrunch reported and we quoted above.)

Bringing all that back to where we were, here again, we find numbers that dwarf the company’s most recent funding round.

And that leads us to a few new questions. If you brought in more than $500 million in investment in 2015, along with $100 million in revenue, and then rocked north to $300 million in the next year, why do you raise $150 million a year after?

Bloomberg posits that “[b]y raising money, Pinterest is choosing to delay a potential initial public offering as its business model matures.”

This is possible. Or it simply could take on the money as its “existing investors” were more than willing to pick up parcels of new shares. The latter argument is predicated on Pinterest not needing the money. Given its past raises and revenue growth, as discussed, that doesn’t seem out of the realm of possibility.

Still, the expanded valuation gives us a new toy to play with, and we would be nothing more than derelict if we didn’t put it to use.

Revenue multiples

Pinterest grew even as its valuation paused, later ticking slightly higher after its most recent round. So, as you can infer, the company’s revenue multiple is rapidly declining.

(Revenue multiples help us understand how much investors are willing to spend on a company’s revenue. Normally, the faster a company is growing at the moment, the more investors are willing to pay for its current revenue in expectation of larger future incomes.)

Don’t presume that a falling revenue multiple is a bad thing. If Pinterest wants to go public, it will need to rapidly shrink the price it charges for revenue. We can see that in the following:

The company was worth $11 billion in 2015 when it recorded around $100 million in revenue. That puts its revenue multiple somewhere over 100. That’s incredibly high.

The trend continues, as time passes:

Keeping the $11 billion figure flat, Pinterest’s $300 million revenue result in 2016 gave it a multiple of around 37. That’s still incredibly high. Too high, at least, for public markets.

In 2017, with its new valuation and two possible revenue tallies for the full year, Pinterest manages further reductions of its top line multiple:

If we push that number up to the possible $600 million figure, the multiple declines to 20.5.

That is still high, but it is getting back to Earth.

However, we cannot just flag a revenue multiple, point to its direction and then declare our work done. We need to put it in context. There is not a super-great public comp for Pinterest, but we can grab some firms that share something in common with our newly capitalized unicorn.

In descending order, here are some public market revenue multiples to bear in mind:

You can see how Pinterest could be called overvalued at its current price. But if the firm can grow like hell all year, and put up, say, a strong Q1 2018, it may have the story it needs for a flat-ish IPO.

So with a slightly odd $150 million in new cash, Pinterest is rapidly maturing its ratios as it heads for a liquidity event.

Homework: If Snap’s declines continue, at what point does its weakness harm Pinterest’s own path to the public markets?